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EX-32.2 - INCEPTION MINING INC.ex32-2.htm
EX-32.1 - INCEPTION MINING INC.ex32-1.htm
EX-31.2 - INCEPTION MINING INC.ex31-2.htm
EX-31.1 - INCEPTION MINING INC.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No. 000-55219

 

Inception Mining Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada   35-2302128
(State or Other Jurisdiction of
Incorporation or Organization)
  (IRS Employer
Identification Number)
     

5330 South 900 East, Suite 280

Murray, Utah

  84117
(Address of Principal Executive Offices)   (Zip Code)

 

801-312-8113

(Registrant’s telephone number, including area code)

 

Copies to:

Brunson Chandler & Jones, PLLC

175 South Main Street

Suite 1410

Salt Lake City, Utah 84111

(801) 303-5721

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [   

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-3 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
(Do not check if smaller reporting company)      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of August 15, 2016, there were 48,952,672 shares of the registrant’s common stock issued and outstanding.

 

 

 

   
   

 

INCEPTION MINING INC.

FORM 10-Q

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION    
Item 1. Financial Statements   F-1
  Condensed Consolidated Balance Sheets as of June 30, 2016   F-1
  Condensed Consolidated Statements of Income for the Three and Six Months ended June 30, 2016 and 2015   F-2
  Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2016 and 2015   F-3
  Notes to Condensed Consolidated Financial Statements   F-4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   13
Item 3. Quantitative and Qualitative Disclosures About Market Risk   17
Item 4. Controls and Procedures   17
     
PART II – OTHER INFORMATION    
Item 1. Legal Proceedings   19
Item 1A. Risk Factors   19
Item 2. Unregistered Sales of Equity Securities and use of Proceeds   19
Item 3. Defaults Upon Senior Securities   19
Item 4. Mine Safety Disclosures   19
Item 5. Other Information   19
Item 6. Exhibits   19
Signature Page   21

 

   
   

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Inception Mining Inc.

Condensed Consolidated Balance Sheets

 

    June 30, 2016     December 31, 2015  
    (Unaudited)        
ASSETS
Current Assets                
Cash and cash equivalents   $ 284,004     $ 137,639  
Accounts receivable     6,301       8,389  
Accounts receivable - related parties     6,582       6,706  
Inventories     1,362,343       969,986  
Prepaid expenses and other current assets     25,632       18,057  
Total Current Assets     1,684,862       1,140,777  
                 
Property, plant and equipment, net     1,765,949       1,759,673  
Other assets     25,500       24,769  
Total Assets   $ 3,476,311     $ 2,925,219  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT  
Current Liabilities                
Accounts payable   $ 435,150     $ 309,085  
Accrued liabilities     5,044,913       4,883,693  
Notes payable     180,000       70,000  
Advances due to related parties     -       728,543  
Convertible notes payable, net of debt discount of $24,016 and $125,265 as of June 30, 2016 and December 31, 2015, respectively     128,561       117,235  
Convertible note payable - related party, net of debt discount of $2,170,625 and $4,317,657 as of June 30, 2016 and December 31, 2015, respectively     4,627,314       1,885,958  
Derivative liability     3,681,112       9,966,095  
Total Current Liabilities     14,097,050       17,960,609  
                 
Long-term convertible note payable, net of debt discount of $0 and $53,345 as of June 30, 2016 and December 31, 2015, respectively     -       1,655  
Mine reclamation obligation     103,956       77,716  
Total Liabilities     14,201,006       18,039,980  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficit                
Preferred stock, $0.00001 par value; 10,000,000 shares authorized, none issued and outstanding     -       -  
Common stock, $0.00001 par value; 500,000,000 shares authorized, 48,952,672 and 46,432,016 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively     490       464  
Additional paid-in capital     (613,476 )     (1,444,079 )
Accumulated deficit     (9,560,633 )     (13,427,504 )
Other comprehensive income - foreign currency translation     (543,413 )     (235,492 )
Total Controlling Interest     (10,717,032 )     (15,106,611 )
Non-Controlling Interest     (7,663 )     (8,150 )
Total Stockholders’ Deficit     (10,724,695 )     (15,114,761 )
Total Liabilities and Stockholders’ Deficit   $ 3,476,311     $ 2,925,219  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

  F-1 
   

 

Inception Mining Inc.

Condensed Consolidated Statements of Income and Comprehensive Loss

(Unaudited)

 

    For the Three Months Ended     For the Six Months Ended  
    June 30, 2016     June 30, 2015     June 30, 2016     June 30, 2015  
Precious Metals Income   $ 2,004,920     $ 1,151,100     $ 3,156,952     $ 1,708,399  
                                 
Operating Expenses                                
Cost of sales     1,023,215       432,307       1,628,944       1,045,564  
General and administrative     473,940       (41,526 )     776,037       48,892  
Depreciation and amortization expense     34,406       36,851       46,769       49,334  
Total Operating Expenses     1,531,561       427,632       2,451,750       1,143,790  
Income (Loss) from Operations     473,359       723,468       705,202       564,609  
                                 
Other Income/(Expenses)                                
Other income (expense)     1,607       7,674       2,438       7,348  
Change in derivative liability     3,336,359       -       6,268,831       -  
Loss on extinguishment of debt     -       -       (14,525 )     -  
Gain (loss) on mining claims and concessions     -       5       -       (960 )
Interest expense     (1,589,728 )     (2,963 )     (3,094,588 )     (4,929 )
Total Other Income     1,748,238       4,716       3,162,156       1,459  
                                 
Net Income from Operations before Income Taxes     2,221,597       728,184       3,867,358       566,068  
Provision for Income Taxes     -       -       -       -  
NET INCOME     2,221,597       728,184       3,867,358       566,068  
NET INCOME - Non-Controlling Interest     (237 )     (8,689 )     (487 )     (2,083 )
NET INCOME - Controlling Interest   $ 2,221,360     $ 719,495     $ 3,866,871     $ 563,985  
                                 
Net income per share - Basic   $ 0.05     $ 0.02     $ 0.08     $ 0.01  
Net income per share - Diluted   $ 0.05     $ 0.02     $ 0.08     $ 0.01  
Weighted average number of shares outstanding during the period - Basic     48,583,455       43,682,133       48,402,769       43,682,133  
Weighted average number of shares outstanding during the period - Diluted     48,784,915       43,682,133       48,604,229       43,682,133  
                                 
Other Comprehensive Income                                
Exchange differences arising on translating foreign operations     (185,464 )     (4,359 )     (307,921 )     (257,415 )
Total Comprehensive Income     2,036,133       723,825       3,654,870       308,653  
Total Comprehensive Income  - Non-Controlling Interest     (121 )     (9,049 )     (371 )     (2,284 )
Total Comprehensive Income - Controlling Interest   $ 2,036,012     $ 714,776     $ 3,654,499     $ 306,369  

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

  F-2 
   

 

Inception Mining Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    For the Six Months Ended  
    June 30, 2016     June 30, 2015  
Cash Flows From Operating Activities:                
Net Income   $ 3,867,358     $ 566,068  
Adjustments to reconcile net income to net cash used in operations                
Depreciation and amortization expense     245,426       187,277  
Impairment of mining concessions     -       961  
Common stock issued for services     58,000       -  
Loss on extinguishment of debt     12,024       -  
Change in derivative liability     (6,214,220 )     -  
Change in warrant liability    

(54,610

)     -  
Amortization of debt discount     2,301,626       -  
Initial value of derivative liabilities     9,247       -  
Changes in operating assets and liabilities:                
Decr (incr) in trade receivables     1,353       (4,057 )
Decr (incr) inventories     194,143       (163,066 )
Decr (incr) prepaid expenses and other current assets    

(8,351

)     (241,711 )
Incr (decr) accounts payable and accrued liabilities     626,519       (111,719 )
Advances due to related parties     (773,484 )     (440,201 )
Net Cash Provided by Operating Activities     265,031       (206,448 )
                 
Cash Flows From Investing Activities:                
Purchase of fixed assets     (274,416 )     (7,654 )
Net Cash Used In Investing Activities     (274,416 )     (7,654 )
                 
Cash Flows From Financing Activities:                
Repayment of notes payable     (1,197,500 )     -  
Repayment of notes payable-related parties     (168,986 )     -  
Proceeds from notes payable     1,135,000       200,000  
Proceeds from notes payable-related parties     387,967       -  
Net Cash Provided by Financing Activities     156,481       200,000  
Effects of exchange rate changes on cash     (731 )     (2,820 )
Net Increase / (Decrease) in Cash     146,365       (16,922 )
Cash at Beginning of Period     137,639       159,678  
Cash at End of Period   $ 284,004     $ 142,756  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $ 297,667     $ 4,929  
Cash paid for taxes   $ -     $ -  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Land purchased with accounts payable   $ 225,000     $ -  
Convertible note payable issued for accounts payable   $ 27,578     $ -  
Convertible note payable - related party issued for accrued liabilities   $ 375,343     $ -  
Common stock issued for conversion of accrued liabilities - related party   $ 725,156     $ -  
Common stock issued for purchase of equipment   $ 10,050     $ -  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

  F-3 
   

 

Inception Mining Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

1. Nature of Business

 

Inception Mining Inc. is a precious metal mineral acquisition, exploration and development company. The Company was incorporated under the name “Golf Alliance Corporation” under the laws of the State of Nevada on July 2, 2007 and has focused on precious metal mineral acquisition and exploration since 2010.

 

On March 5, 2010, the Company amended its articles of incorporation to (1) to change its name to “Silver America, Inc.” and (2) increased its authorized common stock from 100,000,000 to 500,000,000. On June 23, 2010 the Company amended its articles of incorporation to change its name to “Gold American Mining Corp.” On November 21, 2012, the Company implemented a 200-to-1 reverse stock split. Upon effectiveness of the stock split, each shareholder canceled 200 shares of common stock for every share of common stock owned as of November 21, 2012. This reverse stock split was effective on February 13, 2013.

 

On February 25, 2013, Gold American Mining Corp. and its majority shareholder (the “Majority Shareholder”), and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Inception Resources, LLC, a Utah corporation (“Inception Resources”), pursuant to which the Company purchased the U.P. and Burlington Gold Mine in consideration for 16,000,000 shares of common stock of the Company, the assumption of promissory notes in the amount of $950,000 and the assignment of a 3% net royalty. Inception Resources was an entity owned by and under the control of the majority shareholder. This transaction was deemed an asset purchase by entities under common control. The Asset Purchase Agreement closed on February 25, 2013. Inception was a “shell company” (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) immediately prior to the acquisition of the U.P and Burlington Gold Mine pursuant to the terms of the Asset Purchase Agreement, and such classification ceased upon the closing of the Asset Purchase Agreement.

 

On May 17, 2013, the Company amended its articles of incorporation to change its name to Inception Mining Inc. (“Inception” or the “Company”).

 

On October 2, 2015, the Company consummated a merger (the “Merger”) with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico, S.A. de C.V., and holds other mining concessions. Pursuant to the agreement, the Company issued 240,225,901 shares of its common stock and assumed promissory notes in the amount of $5,488,980 and accrued interest of $3,434,426. As a result of the Merger, there was a change in control and it has been treated for accounting purposes as a reverse recapitalization with Clavo Rico, Ltd. being the surviving entity. Clavo Rico’s operations and workings include several historical underground operations dating back to the early Mayan and Spanish occupation, as described further below.

 

The Company’s primary operating mine is located on the 200-hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compañía Minera Cerros del Sur, S.A. de C.V. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.9%.

 

On January 11, 2016 the Board of Directors of Inception Mining Inc. (the “Company”) proposed, and its shareholders approved to effectuate a reverse split of the Company’s outstanding common stock, at a ratio of up to one post-split share per five and half pre-split shares (1:5.5) (the “Reverse Split”). The Company subsequently took steps to carry out the execution of the Reverse Split, including notifying the Financial Industry Regulatory Authority (“FINRA”). On May 25, 2016, FINRA approved the Reverse Split, with a market effective date of May 26, 2016.

 

Immediately before the Reverse Split, the Company had 265,083,479 shares of common stock outstanding. Immediately after the Reverse Split, the Company had 48,197,495 shares of common stock outstanding, pending fractional-share rounding-up calculations to adjust for the Reverse Split.

 

2. Summary of Significant Accounting Policies

 

Going Concern - The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements during six months ended June 30, 2016, the Company incurred net income of $3,867,358 and provided $1,038,515 in cash for operating activities, however the Company had a negative working capital of $12,412,188 and accumulated deficit of $9,560,633. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time.

 

The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding sources. There can be no assurance that the Company’s financing efforts will result in profitable operations or the resolution of the Company’s liquidity problems. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

Management is currently working to make changes that will result in profitable operations and to obtain additional funding sources to meet the Company’s need for cash during the next twelve months and beyond.

 

  F-4 
   

 

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of Inception Mining Inc. and its wholly owned subsidiaries, Inception Development, Corp., Clavo Rico Development Corp., Clavo Rico, Ltd. and Compañía Minera Cerros del Río, S.A. de C.V., and its controlling interest subsidiaries, Compañía Minera Cerros del Sur, S.A. de C.V. and Compañía Minera Clavo Rico, S.A. de C.V. (collectively, the “Company”). All intercompany accounts have been eliminated upon consolidation.

 

Basis of Presentation - The Company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. All adjustments have been made consisting of normal recurring adjustments and consolidating entries, necessary to present fairly the consolidated financial position of the Company and subsidiaries as of June 30, 2016, the results of its consolidated statements of comprehensive income/(loss) for the three month and six month periods ended June 30, 2016 and June 30, 2015, and its consolidated cash flows for the six month periods ended June 30, 2016 and June 30, 2015. The results of consolidated operations for the interim periods are not necessarily indicative of the results for the full year.

 

Cash and Cash Equivalents - The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents. At June 30, 2016 and December 31, 2015, the Company had no cash equivalents.

 

Inventories, Stockpiles and Mineralized Material on Leach Pads - Inventories, including stockpiles and mineralized material on leach pads are carried at the lower of cost or net realizable value. Net realizable value represents the estimated future sales price of the product based on current and long-term metals prices, less the estimated costs to complete production and bring the product to sale. Write-downs of stockpiles, mineralized material on leach pads and inventories to net realizable value are reported as a component of costs applicable to mining revenue. Cost is comprised of production costs for mineralized material produced and processed. Production costs include the costs of materials, costs of processing, direct labor, mine site and processing facility overhead costs, stock-based compensation, and depreciation, amortization and depletion.

 

Stockpiles - Stockpiles represent mineralized material that has been extracted from the mine and is available for further processing. Stockpiles are measured by estimating the number of tons added and removed from the stockpile. Stockpile tonnages are verified by periodic surveys. Costs are allocated to stockpiles based on relative values of material stockpiled and processed using current mining costs incurred up to the point of stockpiling the material, including applicable overhead, depreciation, and depletion relating to mining operations, and removed at each stockpile’s average cost per ton.

 

Mineralized Material on Leach Pads - The Company utilizes a heap leaching process to recover gold from its mineralized material. Under this method, the mineralized material is placed on leach pads where it is treated with a chemical solution that dissolves the gold contained in the material. The resulting gold-bearing solution is further processed in a facility where the gold is recovered. Costs are added to mineralized material on leach pads based on current mining and processing costs, including applicable depreciation relating to mining and processing operations. Costs are transferred from mineralized material on leach pads to subsequent stages of in-process inventories as the gold-bearing solution is processed. The value of such transferred costs of mineralized material on leach pads is based on the average cost per estimated recoverable ounce of gold on the leach pad.

 

The estimates of recoverable gold on the leach pads are calculated from the quantities of material placed on the leach pads (measured tons added to the leach pads), the grade of material placed on the leach pads (based on assay data) and a recovery percentage.

 

Although the quantities of recoverable gold placed on the leach pads are reconciled by comparing the quantities and grades of material placed on leach pads to the quantities and grades quantities of gold actually recovered (metallurgical balancing), the nature of the leaching process inherently limits the ability to precisely monitor inventory levels. As a result, the metallurgical balancing process is constantly monitored and estimates are refined based on actual results over time. Variations between actual and estimated quantities resulting from changes in assumptions and estimates that do not result in write-downs to net realizable value are accounted for on a prospective basis.

 

In-process Inventories - In-process inventories represent mineralized materials that are currently in the process of being converted to a saleable product through the absorption, desorption, recovery (ADR) process. The value of in-process material is measured based on assays of the material fed into the process and the projected recoveries of material. In-process inventories are valued at the average cost of the material fed into the process attributable to the source material coming from the mines, stockpiles and/or leach pads plus the in-process conversion costs, including applicable depreciation relating to the process facilities incurred to that point in the process.

 

Finished Goods Inventories - Finished goods inventories include gold that has been processed through the Company’s ADR facility and are valued at the average cost of their production.

 

Exploration and Development Costs - Costs of acquiring mining properties and any exploration and development costs are expensed as incurred unless proven and probable reserves exist and the property is a commercially mineable property in accordance with FASB ASC 930, Extractive Activities- Mining. Mine development costs incurred either to develop new gold and silver deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment. The Company evaluates, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs, if any, to determine if these costs are in excess of their net realizable value and if a permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized costs and any related property, plant and equipment costs are based upon expected future cash flows and/or estimated salvage value.

 

  2 
   

 

The Company capitalizes costs for mining properties by individual property and defers such costs for later amortization only if the prospects for economic productions are reasonably certain.

 

Capitalized costs are expensed in the period when the determination has been made that economic production does not appear reasonably certain.

 

Mineral Rights and Properties - We defer acquisition costs until we determine the viability of the property. Since we do not have proven and probable reserves as defined by Securities and Exchange Commission (“SEC”) Industry Guide 7, exploration expenditures are expensed as incurred. We expense care and maintenance costs as incurred.

 

We review the carrying value of our mineral rights and properties for impairment whenever there are negative indicators of impairment. Our estimate of the gold price, mineralized materials, operating capital, and reclamation costs are subject to risks and uncertainties affecting the recoverability of our investment in the mineral claims and properties. Although we have made our best, most current estimate of these factors, it is possible that near term changes could adversely affect estimated net cash flows from our mineral claims and properties and possibly require future asset impairment write-downs.

 

Where estimates of future net operating cash flows are not available and where other conditions suggest impairment, we assess recoverability of carrying value from other means, including net cash flows generated by the sale of the asset. We use the units-of-production method to deplete the mineral rights and properties.

 

Fair Value Measurements - The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk, including the party’s own credit risk.

 

Fair value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3: Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

The Company recognizes its derivative liabilities as level 3 and values its derivatives using the methods discussed below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed below are that of volatility and market price of the underlying common stock of the Company.

 

Long-Lived Assets - We review the carrying amount of our long-lived assets for impairment whenever there are negative indicators of impairment. An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair value is generally determined based on discounted future cash flows.

 

Properties, Plant and Equipment - We record properties, plant and equipment at historical cost. We provide depreciation and amortization in amounts sufficient to match the cost of depreciable assets to operations over their estimated service lives or productive value. We capitalize expenditures for improvements that significantly extend the useful life of an asset. We charge expenditures for maintenance and repairs to operations when incurred. Depreciation is computed using the straight-line method over estimated useful lives as follows:

 

Building   7 to 15 years
Vehicles and equipment   3 to 7 years
Processing and laboratory   5 to 15 years
Furniture and fixtures   2 to 3 years

 

  3 
   

 

Reclamation Liabilities and Asset Retirement Obligations - Minimum standards for site reclamation and closure have been established for us by various government agencies. Asset retirement obligations are recognized when incurred and recorded as liabilities at fair value. The liability is accreted over time through periodic charges to earnings. In addition, the asset retirement cost is capitalized and amortized over the life of the related asset. Reclamation costs are periodically adjusted to reflect changes in the estimated present value resulting from the passage of time and revisions to the estimates of either the timing or amount of the reclamation and abandonment costs. The Company reviews, on an annual basis, unless otherwise deemed necessary, the asset retirement obligation at each mine site.

 

Revenue Recognition - Revenue is recognized from sales when persuasive evidence of an arrangement exists, the price is determinable, the product has been delivered, the title has been transferred to the customer and collection of the sales price is reasonably assured. Gold revenue is recorded at an agreed upon spot price and gold ounce measurement resulting in revenue and a receivable at the time of sale. Gold revenue is recorded net of refining charges and discounts. Sales of by-products (such as silver) are credited to costs applicable to mining revenue.

 

All accounts receivable amounts are due from a single customer. Substantially all mining revenues recorded in the current period also related to the same customer. As gold can be sold through numerous gold market traders worldwide, the Company is not economically dependent on a limited number of customers for the sale of its product.

 

Stock Issued For Goods and Services - Common and preferred shares issued for goods and services are valued based upon the fair market value of our common stock or the goods and services received, whichever is the most reliably measurable on the date of issue.

 

Stock-Based Compensation - For stock-based transactions, compensation expense is recognized over the requisite service period, which is generally the vesting period, based on the estimated fair value on the grant date of the award.

 

Income per Common Share - Basic net income per common share is computed by dividing net income, less the preferred stock dividends, by the weighted average number of common shares outstanding. Dilutive income per share includes any additional dilution from common stock equivalents, such as stock options and warrants, and convertible instruments, if the impact is not antidilutive. Since the Company incurred a net loss for the period ended December 31, 2015, all equity-linked instruments are considered anti-dilutive. For the period ended June 30, 2016, the number of common stock equivalents is 201,460.

 

Comprehensive Income - Comprehensive income is made up of the exchange differences arising on translating foreign operations and the net income (loss) for the periods ended June 30, 2016 and 2015.

 

Derivative Liabilities - Derivatives liabilities are recorded at fair value when issued and the subsequent change in fair value each period is recorded in other income (expense) in the consolidated statements of operations. We do not hold or issue any derivative financial instruments for speculative trading purposes.

 

Income Taxes - The Company’s income tax expense and deferred tax assets and liabilities reflect management’s best assessment of estimated future taxes to be paid. Significant judgments and estimates are required in determining the consolidated income tax expense.

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the Company’s ability to recover its deferred tax assets, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company develops assumptions including the amount of future state and federal pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income, and are consistent with the plans and estimates that the Company is using to manage the underlying businesses. The Company provides a valuation allowance for deferred tax assets for which the Company does not consider realization of such deferred tax assets to be more likely than not.

 

Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position.

 

Business Segments – The Company operates in one segment and therefore segment information is not presented.

 

Use of Estimates – In preparing financial statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenditures during the reported periods. Actual results could differ materially from those estimates. Estimates may include those pertaining to valuation of inventories and mineralized material on leach pads, the estimated useful lives and valuation of properties, plant and equipment, mineral rights and properties, deferred tax assets, convertible preferred stock, derivative assets and liabilities, reclamation liabilities, stock-based compensation and payments, and contingent liabilities.

 

Non-Controlling Interest Policy – Non-controlling interest (NCI) is the portion of equity ownership in a subsidiary not attributable to the parent company, who has a controlling interest and consolidates the subsidiary’s financial results with its own. The amount of equity relating to the non-controlling interest is separately identified in the equity section of the balance sheet and the amount of the net income (loss) relating to the non-controlling interest is separately identified on the statement of operations.

 

  4 
   

 

Reclassifications - Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

 

3. Inventories, Stockpiles and Mineralized Materials on Leach Pads

 

Inventories, stockpiles and mineralized materials on leach pads at June 30, 2016 and December 31, 2015 consisted of the following:

 

    June 30, 2016     December 31, 2015  
Supplies   $ 116,331     $ 124,598  
Mineralized Material on Leach Pads     720,803       315,954  
ADR Plant     213,230       206,105  
Finished Ore     311,979       323,329  
Total Inventories   $ 1,362,343     $ 969,986  

 

There were no stockpiles at June 30, 2016 and December 31, 2015.

 

4. Derivative Financial Instruments

 

The Company adopted the provisions of ASC subtopic 825-10, Financial Instruments (“ASC 825-10”) on January 1, 2008. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying value of the Company’s cash, accounts payable, short-term borrowings (including convertible notes payable), and other current assets and liabilities approximate fair value because of their short-term maturity.

 

As of June 30, 2016 or December 31, 2015, the Company did not have any items that would be classified as level 1 or 2 disclosures.

 

All items required to be recorded or measured on a recurring basis are based upon level 3 inputs.

 

The derivative liability as of June 30, 2016, in the amount of $3,681,112 has a level 3 classification.

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities as of June 30, 2016 and December 31, 2015:

 

    Debt Derivative
Liabilities
    Warrant
Derivative
Liabilities
    Total  
Balance, December 31, 2014   $ -     $ -     $ -  
Transfers in upon initial fair value of derivative liabilities     6,914,781       106,804       7,021,585  
Change in fair value of derivative liabilities and warrant liability     2,931,459       13,051       2,944,510  
Transfers to permanent equity upon conversion of note     -       -       -  
Balance, December 31, 2015     9,846,240       119,855       9,966,095  
Transfers in upon initial fair value of derivative liabilities     9,247       -       9,247  
Change in fair value of derivative liabilities and warrant liability     (6,214,220 )     (54,610 )     (6,268,830 )
Change attributed to loss on extinguishment of debt     12,024       -       12,024  
Transfers to permanent equity upon exercise of warrants     -       (37,424 )     (37,424 )
Balance, June 30, 2016   $ 3,653,291     $ 27,821     $ 3,681,112  
Net gain for the period included in earnings relating to the liabilities held at June 30, 2016   $ 6,214,220     $ 54,610     $ 6,268,830  
Net loss for the period included in earnings relating to the liabilities held at December 31, 2015   $ (2,931,459 )   $ (13,051 )   $ (2,944,510 )

  

  5 
   

 

Debt derivatives – As described above, the Company issued convertible promissory notes which are convertible into common stock, at holders’ option, at a discount to the market price of the Company’s common stock. The Company has identified the embedded derivatives related to these notes relating to certain anti-dilutive (reset) provisions. These embedded derivatives included certain conversion features. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of debenture and to fair value as of each subsequent reporting date.

 

At June 30, 2016, the Company marked to market the fair value of the debt derivatives and determined a fair value of $3,653,291. The Company recorded a gain from change in fair value of debt derivatives of $6,214,220 for the period ended June 30, 2016. The fair value of the embedded derivatives was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 220.60% to 277.92%, (3) weighted average risk-free interest rate of 0.20% to 0.36% (4) expected life of 0.02 to 0.50 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

Based upon ASC 840-15-25 (EITF Issue 00-19, paragraph 11) the Company has adopted a sequencing approach regarding the application of ASC 815-40 to its outstanding convertible notes. Pursuant to the sequencing approach, the Company evaluates its contracts based upon earliest issuance date.

 

Warrant derivatives – The Company issued warrants in conjunction with the issuance with the Typenex, JMJ Financial and Firstfire Global Convertible Promissory Notes. These warrants contain certain reset provisions. The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date (issuance date) and to fair value as of each subsequent reporting date.

 

At June 30, 2016, the Company marked to market the fair value of the warrant liability and determined a fair value of $27,821. The Company recorded a gain from change in fair value of warrant liability of $54,610 for the period ended June 30, 2016. The fair value of the warrant liability was determined using Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 209.90%, (3) weighted average risk-free interest rate of 1.01% (4) expected life of 3.98 to 4.00 years, and (5) the quoted market price of the Company’s common stock at each valuation date.

 

Liabilities measured at fair value on a recurring basis are summarized as follows:

 

    Level 1     Level 2     Level 3     Total  
Long-term investments   $ -     $ -     $ -     $ -  
Total     -       -       -       -  
Warrant liability     -       -       27,821       27,821  
Debt Derivative     -       -       3,653,291       3,653,291  
Total   $ -     $ -     $ 3,681,112     $ 3,681,112  

 

5. Properties, Plant and Equipment, Net

 

Properties, plant and equipment at June 30, 2016 and December 31, 2015 consisted of the following:

 

    June 30, 2016     December 31, 2015  
Land   $ 261,246     $ 11,562  
Buildings     2,252,881       2,289,865  
Machinery and Equipment     972,377       964,651  
Office Equipment and Furniture     42,915       42,289  
Vehicles     86,529       88,160  
      3,615,948       3,396,527  
Less Accumulated Depreciation     (1,849,999 )     (1,636,854 )
Total Property, Plant and Equipment   $ 1,765,949     $ 1,759,673  

 

During the six months ended June 30, 2016 and June 30, 2015, the Company recognized depreciation expense of $245,426 and $187,277, respectively.

 

  6 
   

 

6. Mine Reclamation Liability

 

The Company is required to mitigate long-term environmental impacts by stabilizing, contouring, re-sloping, and re-vegetating various portions of our site after mining and mineral processing operations are completed. These reclamation efforts are conducted in accordance with plans reviewed and approved by the appropriate regulatory agencies.

 

The fair value of the long-term liability of $103,956 and $77,716 as of June 30, 2016 and December 31, 2015, respectively, for our obligation to reclaim our mine facility is based on our most recent reclamation plan, as revised, submitted and approved by the Honduran Institute of Geology and Mines (INHGEOMIN) and Ministry of Natural Resources and Environment (SERNA). Such costs are based on management’s current estimate of then expected amounts for the remediation work, assuming the work is performed in accordance with current laws and regulations and using a risk free rate of 3.74% and an inflation rate of 2%. It is reasonably possible that, due to uncertainties associated with the application of laws and regulations by regulatory authorities and changes in reclamation or remediation technology, the ultimate cost of reclamation and remediation could change in the future. We periodically review the accrued reclamation liability for information indicating that our assumptions should change.

 

The increases in the reclamation liability in 2016 and 2015 were related to the expansion of the heap leach facility and related infrastructure.

 

Changes to the asset retirement obligation were as follows:

 

    June 30, 2016     December 31, 2015  
Balance, Beginning of Year   $ 77,716     $ 29,637  
Liabilities incurred     26,240       48,079  
Disposal     -       -  
Balance, End of Year   $ 103,956     $ 77,716  

 

7. Notes Payable

 

Notes Payable   6/30/2016     12/31/2015  
LVD Investments   $ 80,000     $ -  
Pine Valley Investments     -       70,000  
WOC Energy LLC     100,000       -  
Total notes payable   $ 180,000     $ 70,000  

 

3-2-1 Partners, LLC – On March 23, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to 3-2-1 Partners, LLC in the principal amount of $100,000 (the “Note”) due on April 6, 2016 and bears a 8% interest rate. The Company made a payment of $108,000 towards the principal balance and accrued interest of $8,000 on April 8, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

3-2-1 Partners, LLC – On April 14, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to 3-2-1 Partners, LLC in the principal amount of $70,000 (the “Note”) due on April 28, 2016 and bears a 8% interest rate. The Company made a payment of $75,600 towards the principal balance and accrued interest of $5,600 on April 25, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

LVD Investments – On April 29, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to LVD Investments in the principal amount of $70,000 (the “Note”) due on May 13, 2016 and bears a 10% interest rate. The Company made a payment of $75,600 towards the principal balance and accrued interest of $5,600 on May 13, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

LVD Investments – On May 25, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to LVD Investments in the principal amount of $80,000 (the “Note”) due on June 9, 2016 and bears a 10% interest rate. As of June 30, 2016, the outstanding balance of the note was $80,000 and accrued interest was $6,400.

 

WOC Energy, LLC – On March 31, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $30,000 (the “Note”) due on April 20, 2016 and bears a 10% interest rate. The Company made a payment of $33,000 towards the principal balance and accrued interest of $3,000 on April 8, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

WOC Energy, LLC – On April 14, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $70,000 (the “Note”) due on April 28, 2016 and bears a 12% interest rate. The Company made a payment of $78,400 towards the principal balance and accrued interest of $8,400 on April 22, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

  7 
   

 

WOC Energy, LLC – On April 27, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $90,000 (the “Note”) due on May 11, 2016 and bears a 12% interest rate. The Company made a payment of $100,800 towards the principal balance and accrued interest of $10,800 on May 2, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

WOC Energy, LLC – On May 13, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on May 27, 2016 and bears a 10% interest rate. The Company made a payment of $110,000 towards the principal balance and accrued interest of $10,000 on May 24, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

WOC Energy, LLC – On May 26, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on June 9, 2016 and bears a 10% interest rate. The Company made a payment of $110,000 towards the principal balance and accrued interest of $10,000 on June 3, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

WOC Energy, LLC – On June 8, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on June 22, 2016 and bears a 8% interest rate. The Company made a payment of $108,000 towards the principal balance and accrued interest of $8,000 on June 21, 2016. As of June 30, 2016, the outstanding balance of the note was $0.

 

WOC Energy, LLC – On June 23, 2016, the Company issued an unsecured Short-Term Promissory Note (“Note”) to WOC Energy, LLC in the principal amount of $100,000 (the “Note”) due on July 7, 2016 and bears a 8% interest rate. As of June 30, 2016, the outstanding balance of the note was $100,000 and accrued interest was $8,000.

 

8. Convertible Notes Payable

 

Convertible notes payable were comprised of the following as of June 30, 2016 and December 31, 2015:

 

Convertible Notes Payable   6/30/2016     12/31/2015  
Brunson, Chandler & Jones convertible note payable   $ 27,578     $ -  
Dave Wavrek convertible note payable     -       4,500  
Iconic Holdings convertible note payable     -       55,000  
JMJ Financial convertible note payable     -       55,000  
Jonathan Shane convertible note payable     55,000       55,000  
Phil Zobrist convertible note payable     60,000       60,000  
Typenex convertible note payable     -       58,000  
UP and Burlington convertible note payable     10,000       10,000  
Total Convertible Notes Payable     152,578       297,500  
Less unamortized discount     (24,017 )     (178,610 )
Total Convertible Notes Payable, Net of Unamortized Debt Discount     128,561       118,890  
Less: Current Portion    

(128,561

)     (117,235 )
Total Convertible Notes Payable, Net of Current Portion   $ -     $ 1,655  

 

Brunson, Chandler & Jones, PLLC – On January 13, 2016, the Company issued an unsecured Convertible Promissory Note (“Note”) to Brunson, Chandler & Jones, PLLC (“BCJ”), in the principal amount of $27,578 (the “Note”) due on July 13, 2016 and bears 10% per annum interest, due at maturity as settlement of services rendered for the same amount. The Note is convertible into common stock, at holder’s option, at 10% discount of the lowest VWAP of the common stock during the 3 trading day period prior to conversion. The Company has identified the embedded derivatives related to the note. The embedded derivatives relate to conversion features.

 

The accounting treatment of derivative financial instruments requires that the Company record fair value of the derivatives as of the inception date of the notes and to fair value as of each subsequent reporting date, which at March 31, 2016 was $3,627. At the inception of the notes, the Company determined the aggregate fair value of $9,247 of the embedded derivatives. The fair value of the embedded derivatives were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%; (2) expected volatility of 288.75%, (3) weighted average risk-free interest rate of 0.46%, (4) expected life of 0.50 year, and (5) estimated fair value of the Company’s common stock from $0.74 (0.14 pre-split) per share based upon quoted market price. The initial fair value of the embedded debt derivatives of $9,247 were allocated as a debt discount. For the six months ended June 30, 2016, the Company amortized $8,586 of debt discount to current period operations as interest expense. As of June 30, 2016, the gross balance of the note was $27,578 and accrued interest was $2,758.

 

Dave Wavrek – On June 7, 2014, the Company entered into an unsecured Note Purchase Agreement for the sale of a 20% convertible promissory note in which the Company will receive the principal amount of $100,000. The note bears interest at the rate of 20% per annum and all interest and principal must be repaid on December 31, 2015. The note is convertible, at the holder’s option into shares of the Company’s common stock at $2.48 (0.45 Pre-split) per share. A beneficial conversion feature on the new note was recorded for $100,000. For the six months ended June 30, 2016, the Company amortized $0 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $0 and accrued interest was $34,500.

 

  8 
   

 

Iconic Holdings – On November 17, 2015, the Company entered into an unsecured Note Purchase Agreement in which the Company will receive the principal amount of $55,000 with an original issue discount of 10% of loaned funds. The Company has received funds totaling $50,000 and recorded additional principal due to the original issue discount totaling $5,000. The note bears interest at the rate of 10% per annum and all interest and principal must be repaid on June 1, 2016. The note is convertible into common stock, at the holder’s option, at the lower of $0.83 (0.15 pre-split) or 60% of the lowest three trading prices of the Company’s common stock during the 20 consecutive trading days prior to the date of conversion. On February 9, 2016, the Company made a payment of $6,000 against the principal balance. In May 2016, the Company made payments of $71,000 to pay the note and accrued interest in full. For the six months ended June 30, 2016, the Company amortized $42,716 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $0 and accrued interest was $0.

 

JMJ Financial Services – On December 9, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to JMJ Financial Services (“JMJ”), in the principal amount of $55,000 (the “Note”) due on December 9, 2017 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (less an original issue discount (“OID”) of $5,000). The Note is convertible into common stock, at holder’s option, at the lesser of $1.34 (0.25 pre-split) or a 40% discount of the lowest trading price of the common stock during the 25 trading day period prior to conversion. On May 25, 2016, the Company made a payment of $84,000 against the balance of the note and accrued interest. For the six months ended June 30, 2016, the Company amortized $53,345 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $0 and accrued interest was $0.

 

Jonathan Shane – On June 15, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Jonathan Shane in the principal amount of $25,000 (the “Note”) due on June 14, 2016 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $25,000. The Note is convertible into common stock, at holder’s option, at a price of $3.25 (0.59 pre-split) or a 40% discount to the average of the three lowest trading prices of the common stock during the 25 trading day period prior to conversion. As of June 30, 2016, this note had reached maturity. The note was subsequently settled in July 2016.

 

On July 7, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Jonathan Shane in the principal amount of $30,000 (the “Note”) due on July 6, 2016 and bears 12% per annum interest, due at maturity. The total net proceeds the Company received was $30,000. The Note is convertible into common stock, at holder’s option, at a price of $3.25 (0.59 pre-split) or a 40% discount to the average of the three lowest trading prices of the common stock during the 25 trading day period prior to conversion.

 

For the six months ended June 30, 2016, the Company amortized $26,329 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $55,000 and accrued interest was $5,638.

 

Phil Zobrist – On January 11, 2013, the Company issued an unsecured Promissory Note (“Note”) to Phil Zobrist in the principal amount of $60,000 (the “Note”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $60,000. On October 2, 2015, the Company entered into a new convertible note with Phil Zobrist that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $29,412 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. For the six months ended June 30, 2016, the Company amortized $22,614 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $60,000 and accrued interest was $37,460.

 

Typenex – On July 7, 2015, the Company issued an unsecured Convertible Promissory Note (“Note”) to Typenex Co-Investment LLC (“Typenex”), in the principal amount of $58,000 (the “Note”) due on February 7, 2016 and bears 10% per annum interest, due at maturity. The total net proceeds the Company received was $50,000 (less an original issue discount (“OID”) of $5,000 and legal fees reimbursement of $3,000). The Note is convertible into common stock, at holder’s option, at a 40% discount to the average of the three lowest bid prices of the common stock during the 20 trading day period prior to conversion. However, should the average of the three lowest bid prices as described above fall below $3.30 (0.60 pre-split), then the applicable discount increases to 45%. In addition, the conversion price is to subject to be reduced should the Company issue or grant common stock or equivalents (as defined) at a lower issuance price (dilutive issuance). On January 7, 2016, the Company made a payment of $20,437 for principal of $12,625, accrued interest of 3,372, an extension fee of $2,500 and premium fee of $1,940. On February 3, 2016, the Company made a payment of $17,457 for principal of $15,125, accrued interest of 392 and premium fee of $1,940. On March 4, 2016, the Company made a payment of $17,291 for principal of $15,125, accrued interest of $226 and premium fee of $1,940. On April 8, 2016, the Company made a payment of $17,163 for principal of $15,125, accrued interest of $98 and premium fee of $1,940. For the six months ended June 30, 2016, the Company amortized $10,251 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $0 and accrued interest was $0.

 

UP and Burlington Development – On February 25, 2013, the Company, its majority shareholder, and its wholly-owned subsidiary, Inception Development Inc. (the “Subsidiary”), entered into an Asset Purchase Agreement with Inception Resources, LLC, a Utah corporation, pursuant to which the Company purchased the U.P. and Burlington Gold Mine in consideration of 16,000,000 shares of common stock valued at $160 (valued at par value of $0.00001 because of the entities being under common control), the assumption of promissory notes in the amount of $800,000 and $150,000 and the assignment of a 3% net royalty. The Asset Purchase Agreement closed on February 25, 2013. On November 1, 2013, one of the notes was renegotiated with the note holder. The original note was restructured and treated as an extinguishment and as such is now convertible into shares of the Company’s common stock at $2.48 (0.25 pre-split) per share. All the other points of the note remained the same. A beneficial conversion feature on the new note was recorded for $630,000. On February 11, 2014, the Company converted $130,000 of principal into 288,889 shares of common stock. On December 10, 2014, the note holder elected to convert $41,250 of the principle balance of the note into 91,666 shares of common stock at $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to convert $300,000 of the principle balance of the note into 666,666 shares of common stock at $2.48 (0.45 pre-split) per share. On December 17, 2014, the note holder elected to forgive $148,750 of the principle balance of the note. As of June 30, 2016, the outstanding balance on this note was $10,000.

 

  9 
   

 

9. Convertible Notes Payable – Related Parties

 

Convertible Notes Payable - Related Parties   6/30/2016     12/31/2015  
Claymore Management convertible note payable   $ 185,000     $ 185,000  
GAIA Ltd convertible note payable     1,150,000       1,150,000  
Legends Capital convertible note payable     765,000       765,000  
LWB Irrev Trust convertible note payable     1,101,000       1,101,000  
MDL Ventures convertible note payable     1,368,959       774,634  
Silverbrook Corporation convertible note payable     2,227,980       2,227,980  
Total Convertible Notes Payable - Related Parties     6,797,939       6,203,614  
Less unamortized discount     (2,170,625 )     (4,317,657 )
Total Convertible Notes Payable - Related Parties, Net of Unamortized Debt Discount   $ 4,627,314     $ 1,885,957  

 

Claymore Management – On March 18, 2011, the Company issued an unsecured Promissory Note (“Note”) to Claymore Management in the principal amount of $185,000 (the “Note”) due on demand and bears 0% per annum interest. The total net proceeds the Company received was $185,000. On October 2, 2015, the Company entered into a new convertible note with Claymore Management that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from March 18, 2011 in the amount of $151,355 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. For the six months ended June 30, 2016, the Company amortized $73,838 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $185,000 and accrued interest was $176,170.

 

GAIA Ltd. – Between December 2011 and October 2012, the Company issued seven unsecured Promissory Notes (“Notes”) to GAIA Ltd. for a total principal amount of $1,150,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $1,150,000. On October 2, 2015, the Company entered into a new convertible note with GAIA Ltd. that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $724,463 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. For the six months ended June 30, 2016, the Company amortized $458,991 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $1,150,000 and accrued interest was $878,720.

 

Legends Capital Group – Between October 2011 and September 2012, the Company issued eleven unsecured Promissory Notes (“Notes”) to Legends Capital Group for a total principal amount of $765,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $765,000. On October 2, 2015, the Company entered into a new convertible note with Legends Capital Group that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $504,806 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. For the six months ended June 30, 2016, the Company amortized $305,329 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $765,000 and accrued interest was $607,421.

 

LW Briggs Irrevocable Trust – Between December 2010 and January 2013, the Company issued eight unsecured Promissory Notes (“Notes”) to LW Briggs Irrevocable Trust for a total principal amount of $1,101,000 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $1,101,000. On October 2, 2015, the Company entered into a new convertible note with LW Briggs Irrevocable Trust that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $814,784 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. For the six months ended June 30, 2016, the Company amortized $439,434 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $1,101,000 and accrued interest was $962,470.

 

MDL Ventures – The Company entered into an unsecured convertible note payable agreement with MDL Ventures, LLC, which is 100% owned by a Company officer, effective October 1, 2014, due on December 31, 2016 and bears 18% per annum interest, due at maturity. Principal on the convertible note is convertible into common stock at the holder’s option at a price of the lower of $0.99 (0.18 pre-split) or 50% of the lowest three daily volume weighted average prices of the Company’s common stock during the 20 consecutive days prior to the date of conversion. For the six months ended June 30, 2016, the Company amortized $0 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $1,368,959 and accrued interest was $0.

 

  10 
   

 

Silverbrook Corporation – Between March 2011 and February 2015, the Company issued 23 unsecured Promissory Notes (“Notes”) to Silverbrook Corporation for a total principal amount of $2,227,980 (the “Notes”) due on demand and bearing 0% per annum interest. The total net proceeds the Company received was $2,227,980. On October 2, 2015, the Company entered into a new convertible note with Silverbrook Corporation that matures on December 31, 2016 and bears 18% per annum interest. The Company agreed to accrue interest from inception of these Notes in the amount of $1,209,606 and charged this amount to interest expense during the year ended December 31, 2015. The Note is convertible into common stock, at holder’s option, at a price of $0.99 (0.18 pre-split) or a 50% discount to the average of the three lowest VWAP of the common stock during the 20 trading day period prior to conversion. For the six months ended June 30, 2016, the Company amortized $869,440 of debt discount to current period operations as interest expense. As of June 30, 2016 the gross balance of the note was $2,227,980 and accrued interest was $1,508,462.

 

10. Stockholders’ Deficit

 

Common Stock

 

On January 1, 2016, 100,000 shares of common stock were issued to Whit Cluff as payment for consulting services performed for the Company. These shares were valued at $0.20 per share for a value of $20,000.

 

On January 5, 2016, 100,000 shares of common stock were issued to Brunson Chandler & Jones PLLC as payment for legal services performed for the Company. These shares were valued at $0.20 per share for a value of $20,000.

 

On January 11, 2016, the Company issued 5,194,537 shares of common stock to The Panamera Trust pursuant to the exercise of a cashless warrant.

 

On January 11, 2016, the Company issued 5,925,192 shares of common stock to Cornerstone Holdings LTD pursuant to the exercise of a cashless warrant.

  

On January 11, 2016, the Company authorized a 5.5:1 reverse stock split on its shares of common stock. The reverse split was approved and announced by FINRA with an effective date of May 26, 2016. There were 265,083,479 shares of common stock issued and outstanding prior to the split which resulted in 48,197,495 post-split shares of common stock outstanding.

 

On December 15, 2015, the Company entered into a Settlement Agreement with Brian Brewer through which he agreed to return up to 500,000 shares of common stock in the Company. Pursuant to the terms of that Settlement Agreement on January 15, 2016, 83,335 shares of the Company were returned to the Company for cancellation, on February 17, 2016, 83,333 shares of the Company were returned to the Company for cancellation, on March 15, 2016, 83,333 shares of the Company were returned to the Company for cancellation, on April 26, 2016, 83,333 shares of the Company were returned to the Company for cancellation, and on May 18, 2016, the remaining 83,333 shares of the Company were returned to the Company for cancellation.

 

On May 19, 2016, 18,182 shares of common stock were issued to Rodney Sperry as payment for consulting services performed for the Company. These shares were valued at $0.99 (0.18 pre-split) per share for a value of $18,000.

 

On June 3, 2016, 500,000 shares of common stock were issued for the conversion of debt obligation to related parties. These shares were valued at the amount of the debt converted of $725,853.

 

On June 30, 2016, 20,100 shares of common stock were issued to Bodell Construction as payment for equipment acquired by the Company. These shares were valued at $0.50 per share for a value of $10,050.

 

Warrants

 

The following tables summarize the warrant activity during the six months ended June 30, 2016 and the year ended December 31, 2015:

 

Stock Warrants   Number of Warrants     Weighted Average
Exercise Price
 
Balance at December 31, 2014     75,094     $ 5.72  
Granted     109,091       3.63  
Exercised     -       -  
Forfeited     -       -  
Balance at December 31, 2015     184,185       5.72  
Granted     -       -  
Exercised     (66,099 )     1.82  
Forfeited     -       -  
Balance at June 30, 2016     118,086     $ 5.11  

 

  11 
   

 

 

2016 Outstanding Warrants   Warrants Exercisable  
Range of Exercise
Price
  Number
Outstanding at
June 30, 2016
    Weighted Average
Remaining
Contractual Life
    Weighted
Average Exercise
Price
    Number
Exercisable at
June 30, 2016
    Weighted
Average Exercise
Price
 
$ 1.13 - 6.88     118,086        2.34 years     $ 5.11       118,086     $ 5.11  

 

11. Related Party Transactions

 

Consulting Agreement – In February 2014, the Company entered into a consulting agreement with a stockholder/director. The Company agreed to pay $18,000 per month for twelve months. As of June 30, 2016, the Company owed $540,000 to the stockholder/director in accrued consulting fees.

 

Lease – The Company leases office space from a related affiliate, MDL Ventures, LLC, which includes month to month terms. Rent expense for the six months ended June 30, 2016 amounted to $5,724.

 

Employment Agreements – On February 25, 2013, the Company entered into an employment agreement with Michael Ahlin pursuant to which he was appointed as the Chief Executive Officer, President, Treasurer, Secretary and Director of the Company. Under the terms of his employment agreement, Mr. Ahlin will become eligible to receive an annual salary, bonus and stock option upon the Company achieving positive earnings before interest, taxes, depreciation, and amortization (“EBITDA”) in two consecutive quarters as reflected in its filings with the Securities and Exchange Commission (“SEC”). On August 1, 2015, the Company amended the previously entered into employment agreement with Michael Ahlin pursuant to which the eligibility requirements of the Company achieving positive EBITDA in two consecutive quarters as reflected in its filings with the SEC were removed.

 

12. Commitments and Contingencies

 

Litigation

 

The Company at times is subject to other legal proceedings that arise in the ordinary course of business. In the opinion of management, as of June 30, 2016, the amount of ultimate liability with respect to such matters, if any, is not likely to have a material impact on the Company’s business, financial position, results of operations or liquidity. However, as the outcome of litigation and other claims is difficult to predict significant changes in the estimated exposures could exist. During the period covered by this report, we were served with a lawsuit from one of our creditors. On July 8, 2016, a judgment was entered against us in the amount of $10,000 in favor of a creditor and we paid the amount due under this judgment of $10,207 on August 2, 2016 in full settlement of this dispute.

 

13. Subsequent Events

 

In Accordance with ASC 855-10, Company management has evaluated all events that have occurred subsequent to June 30, 2016 and determined there are no subsequent events that are material to be reported in this quarterly report.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward Looking Statements

 

Except for historical information, the following Management’s Discussion and Analysis contains forward-looking statements based upon current expectations that involve certain risks and uncertainties. Such forward-looking statements include statements regarding, among other things, (a) discussions about mineral resources and mineralized material, (b) our projected sales and profitability, (c) our growth strategies, (d) anticipated trends in our industry, (e) our future financing plans, (f) our anticipated needs for working capital, (g) our lack of operational experience and (h) the benefits related to ownership of our common stock. Forward-looking statements, which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words or other variations on these words or comparable terminology. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in this Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Report will in fact occur as projected.

 

Introduction to Interim Consolidated Financial Statements.

 

Certain statements made in this Form 10-Q are “forward-looking statements” regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company’s plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove to be inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved.

 

The forward-looking statements included in this Form 10-Q and referred to elsewhere are related to future events or our strategies or future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “believe,” “anticipate,” “future,” “potential,” “estimate,” “encourage,” “opportunity,” “growth,” “leader,” “expect,” “intend,” “plan,” “expand,” “focus,” “through,” “strategy,” “provide,” “offer,” “allow,” commitment,” “implement,” “result,” “increase,” “establish,” “perform,” “make,” “continue,” “can,” “ongoing,” “include” or the negative of such terms or comparable terminology. All forward-looking statements included in this Form 10-Q are based on information available to us as of the filing date of this report, and the Company assumes no obligation to update any such forward-looking statements, except as required by law. Our actual results could differ materially from the forward-looking statements.

 

  13 
   

 

The interim consolidated financial statements included herein have been prepared by Inception Mining Inc. (“Inception Mining” or the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). Certain information and footnote disclosure normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These interim consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in this filing.

 

In the opinion of management, all adjustments have been made consisting of normal recurring adjustments and consolidating entries, necessary to present fairly the consolidated financial position of the Company and subsidiaries as of June 30, 2016, the results of its consolidated statements of comprehensive income/(loss) for the three-month periods ended June 30, 2016 and June 30, 2015, and its consolidated cash flows for the three-month periods ended June 30, 2016 and June 30, 2015. The results of consolidated operations for the interim periods are not necessarily indicative of the results for the full year.

 

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

 

Overview

 

We are a mining company that was formed in Nevada on July 2, 2007. As a mining company, we are engaged in the production of previous metals. Our activities are not limited to production and they also include acquisition, exploration, and development of mineral properties, primarily for gold, from owned mining properties. Inception Mining has acquired two projects, as described below. Our target properties are those that have been the subject of historical exploration. We have generated revenue from mining operations.

 

Clavo Rico Gold Mine, Honduras, Central America 

 

On October 2, 2015, the Company consummated a merger with Clavo Rico Ltd. (“Clavo Rico”). Clavo Rico is a privately held Turks and Caicos company with principal operations in Honduras, Central America. Clavo Rico operates the Clavo Rico mining concession through its subsidiaries Compañía Minera Cerros del Sur, S.A de C.V. and Compañía Minera Clavo Rico, S.A. de C.V. and holds other mining concessions. Its workings include several historical underground mining operations dating back to the early Mayan and Spanish occupation.

 

The Company’s primary mine is located on the 200-hectare Clavo Rico Concession, located in southern Honduras. This mine was originally explored and exploited in the 16th century by the Spanish, and more recently has been operated by Compañía Minera Cerros del Sur, S. de R.L. as a small family business. In 2003, Clavo Rico’s predecessor purchased a 20% interest and later increased its ownership to 99.5%. This company has since invested over five million dollars in the expansion and development of the mine and surrounding properties.

 

The operations begin by crushing ore to approximately 3/8-inch size pebbles, which is then mixed with sand and loaded on the recovery pad for processing. The ore is sprinkled with a solution that leaches the gold from the rock, and the solution is collected and processed on-site at Clavo Rico’s own ADR plant. The doré bars that result from this process are shipped to the USA for refining.

 

Prior to the expansion, the mine had only been processing approximately 500 tons of ore per month. The current recovery operation has been sized to handle from 500 to 1,000 tons of ore per day on a recovery bed that has the capacity to receive up to 800,000 tons of ore. This expansion represents a sizeable increase in capacity. The company commenced full operations on January 1, 2012 and believes that sufficiently high gold content ore bodies have been located and blocked out to load the recovery bed to capacity by the end of 2017. The ore body has had some preliminary drilling undertaken by the company and the assays of samples indicate that the ore should have grades in the range of 2-5 grams of gold per ton.

 

The Company relies heavily on the neighboring communities that support Clavo Rico mine operations. El Corpus, a small village situated just below the mine, is one such community. To show its gratitude for the support of these people, many of whom are employed by the mine, the Company is committed to care for their holistic well-being. To that end, Inception undertakes many efforts to maintain a high quality of life for every living thing in the area, including reforestation of trees and vegetation; proper treatment and disposal of mine wastewater; wildlife awareness and preservation; and encouraging education in the community through a trade school built and operated by the Company.

 

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UP & Burlington Gold Mine, Salmon, Lemhi County, Idaho

 

On February 25, 2013 the Company acquired certain real property and the associated exploration permits and mineral rights commonly known as the UP and Burlington Gold Mine (“UP & Burlington”) pursuant to an asset purchase agreement. We are presently in the exploration stage at UP & Burlington. UP & Burlington contains two federal patented mining claims, which Inception Resources acquired for the purpose of the exploration and potential development of gold on the 40 acres that comprise this property.

 

Discovered in 1892, UP & Burlington is a private gold property that has been held unused in a family trust for the past 75 years. UP & Burlington is located in Lemhi County, Northwest of Salmon, Idaho, at an elevation of 3,994 feet. The UP & Burlington site is located six miles from the city of Salmon; is 0.6 miles away from the closest major road (Ridge Road); and is 1.56 miles away from the closest major power line. We believe Salmon, along with the surrounding County of Lemhi, provides an excellent infrastructure for our mine. Salmon has a population of 3,122 and Lemhi County has a population of 7,806. In September 2011, heavy maintenance and right-of-way repair was completed and a new road to UP & Burlington was constructed.

 

UP & Burlington’s two gold mining claims were brought to patent in 1900, which covers the Mine’s 40 acres. Subsequently, in 1989, a U.S. Forest Survey was performed on the UP & Burlington site confirming that the patented claims cover an area that is six hundred feet by three thousand feet (600’x3000’). The Mine’s patented claims remove the challenges associated when working on U.S. Forest lands, Bureau of Land Management (“BLM”), state or other property types. With our purchase of UP & Burlington, we have the benefit of working on private land, which requires only a hauling/road permit to commence significant operations.

 

The Company has obtained the necessary permitting, cut additional access roads, made surface improvements, and initiated surface mining on a 2,500 foot per day lighted vein for bulk sampling, vein definition and ore valuation. In Phase II, we plan to contract an underground mining and operations plan, expand portal development leveraging existing underground access, and implement underground mining to a depth based on optimizing costs versus processed ore value. There is no guarantee that we will be successful in implementing any stage of our plans.

 

Our tactical plan includes obtaining a Lemhi County Conditional Use Permit, an Idaho Department of Lands Surface Reclamation Bond, and permitting for the U.S. Forest Service Access Road, as well as obtaining major contracts such as geotechnical contracts, surface mining contracts, toll processing contracts and underground mine plan contracts.

 

The Company and its independent consultants have developed a detailed exploration-drilling program to confirm and expand mineralized zones in the Mine and collect additional environmental and technical data. The first phase of confirmation and expansion drilling began in 2013. The Company intends to continue drilling, metallurgical testing, engineering and environmental programs and studies and has updated the historic feasibility study and environmental permit applications. 

 

Nevada Exploration 

 

The Company, through its partner, has been conducting greenfield mineral exploration in Nevada. The focus of the exploration has been on the western segment of the Northern Nevada Rift. There are two projects on the aeromagnetic feature in the area. Projects are drill-ready with targets based on selenium soil anomalies, geophysical anomalies, mapped faults and projected structural intersections. The Company plans to expand and identify this resource with its partner.

 

In addition to the exploration in the Northern Nevada Rift, the Company plans to continue to identify possible acquisition targets in Nevada and other locations.

 

Results of Operations

 

Six-months ended June 30, 2016 compared to the six-months ended June 30, 2015

 

We had a net income of $3,867,358 for the six-months ended June 30, 2016, and a net income of $566,068 for the six-months ended June 30, 2015. This change in our results over the two periods is primarily the result of increased precious metal production, fewer professional and consulting agreements, where the Company utilizes the expertise, professional relationships, and knowledge of said consultants, are classified as general and administrative expenses that have been entered into as well as the decrease in exploration costs, changes in derivatives and the changes in debt discounts which are included in other income/expense. The following table summarizes key items of comparison and their related increase (decrease) for the six months ended June 30, 2016 and 2015:

 

   Six Months Ended June 30,   Increase/ 
   2016   2015   (Decrease) 
Revenues  $3,156,952   $1,708,399   $1,448,553 
Cost of Sales   1,628,944    1,045,564    583,380 
General and Administrative   776,037    48,892    727,145 
Depreciation and Amortization Expenses   46,769    49,334    (2,565)
Total Operating Expenses   2,451,750    1,143,790    1,307,960 
Income (Loss) from Operations   705,202    564,609    (140,593)
Other Income (expense)   2,438    7,348    4,910 
Change in Derivative Liabilities   6,268,831    -    (6,268,831)
Loss on Extinguishment of Debt   (14,525)   -    14,525 
Loss on Impairment of Mining Claim   -    (960)   (960)
Interest Expense   (3,094,588)   (4,929)   3,089,659 
Income (Loss) from Operations Before Taxes   3,867,358    566,068    (3,301,290)
Net Income (Loss)  $3,867,358   $566,068   $(3,301,290)

 

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Three-months ended June 30, 2016 compared to the three-months ended June 30, 2015

 

We had a net income of $2,221,597 for the three-months ended June 30, 2016, and a net income of $728,184 for the three-months ended June 30, 2015. This change in our results over the two periods is primarily the result of increased precious metal production, fewer professional and consulting agreements, where the Company utilizes the expertise, professional relationships, and knowledge of said consultants, are classified as general and administrative expenses that have been entered into as well as the decrease in exploration costs, changes in derivatives and the changes in debt discounts which are included in other income/expense. The following table summarizes key items of comparison and their related increase (decrease) for the three months ended June 30, 2016 and 2015:

 

   Three Months Ended June 30,   Increase/ 
   2016   2015   (Decrease) 
Revenues  $2,004,920   $1,151,100   $853,820 
Cost of Sales   1,023,215    432,307    590,908 
General and Administrative   473,940    (41,526)   515,466 
Depreciation and Amortization Expenses   34,406    36,851    (2,445)
Total Operating Expenses   1,531,561    427,632    1,103,929 
Income (Loss) from Operations   473,359    723,468    250,109 
Other Income (expense)   1,607    7,674    6,067 
Change in Derivative Liabilities   3,336,359    -    (3,336,359)
Loss on Extinguishment of Debt   -    -    - 
Loss on Impairment of Mining Claim   -    5    5 
Interest Expense   (1,589,728)   (2,963)   1,586,765 
Income (Loss) from Operations Before Taxes   2,221,597    728,184    (1,493,413)
Net Income (Loss)  $2,221,597   $728,184   $(1,493,413)

 

Liquidity and Capital Resources

 

Our balance sheet as of June 30, 2016 reflects assets of $3,476,311. We had cash in the amount of $284,004 and working capital deficit in the amount of $12,412,188 as of June 30, 2016. Thus, we do not have sufficient working capital to enable us to carry out our stated plan of operation for the next twelve months. We will need to raise approximately $2,000,000 in order to fully implement our business plan.

 

Working Capital

   June 30, 2016   December 31, 2015 
Current assets  $1,684,862   $1,140,777 
Current liabilities   14,097,050    17,960,609 
Working capital deficit  $(12,412,188)  $(16,819,832)

 

We anticipate generating losses and, therefore, may be unable to continue operations in the future, if we don’t acquire additional capital and issue debt or equity or enter into a strategic arrangement with a third party.

 

Going Concern Consideration

 

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company has no revenue generating operations and has an accumulated deficit of $9,560,633. In addition, there is a working capital deficit of $12,412,188 as of June 30, 2016. This raises substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company’s ability to raise additional capital and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

   Six Months Ended June 30, 
   2016   2015 
Net Cash Provided by Operating Activities  $265,031   $(206,448)
Net Cash Used in Investing Activities   (274,416)    (7,654)
Net Cash Provided by Financing Activities   156,481    200,000 
Effects of Exchange Rate Changes on Cash   (731)   (2,820)
Net Increase (Decrease) in Cash  $146,365   $(16,922)

 

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Operating Activities

 

Net cash flow provided by operating activities during the six months ended June 30, 2016 was $265,031, an increase of $471,479 from the $(206,448) net cash outflow during the six months ended June 30, 2015. This increase in the cash provided by operating activities was primarily due to the increase in precious metals production by the Company.

 

Investing Activities

 

Investing activities during the six months ended June 30, 2016 used $274,416 an increase of $266,762 from the $7,654 used by investing activities during the six months ended June 30, 2015. During the six months ended June 30, 2016, the Company purchased $274,416 in fixed assets.

 

Financing Activities

 

Financing activities during the six months ended June 30, 2016 provided $156,481, a decrease of $43,519 from the $200,000 provided by financing activities during the six months ended June 30, 2015. During the six months ended June 30, 2016, the Company received $1,135,000 in proceeds from a short-term notes and $387,697 in proceeds from convertible notes with related parties. The Company also made $1,197,500 in payments on notes payable, including the short-term notes payable and $168,986 in payments to notes payable to related parties.

 

We are currently seeking up to $2,000,000 in equity financing in order to fully implement our business plan.

 

Critical Accounting Policies

 

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles used in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management’s application of accounting policies. We believe that understanding the basis and nature of the estimates and assumptions involved with the following aspects of our financial statements is critical to an understanding of our financials.

 

Costs of acquiring mining properties and any exploration and development costs are expensed as incurred unless proven and probable reserves exist and the property is a commercially mineable property. Mine development costs incurred either to develop new gold and silver deposits, expand the capacity of operating mines, or to develop mine areas substantially in advance of current production are capitalized. Costs incurred to maintain current production or to maintain assets on a standby basis are charged to operations. Costs of abandoned projects are charged to operations upon abandonment. The Company evaluates, at least quarterly, the carrying value of capitalized mining costs and related property, plant and equipment costs, if any, to determine if these costs are in excess of their net realizable value and if a permanent impairment needs to be recorded. The periodic evaluation of carrying value of capitalized costs and any related property, plant and equipment costs are based upon expected future cash flows and/or estimated salvage value.

 

The Company capitalizes costs for mining properties by individual property and defers such costs for later amortization only if the prospects for economic productions are reasonably certain. Capitalized costs are expensed in the period when the determination has been made that economic production does not appear reasonably certain.

 

Recent Accounting Pronouncements

 

For recent accounting pronouncements, please refer to the notes to financial statements in Part I, Item 1 of this Quarterly Report.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to include disclosure under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Securities Exchange Act of 1934, as amended, or 1934 Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer (principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the 1934 Act, as of the end of the period covered by this report. Based on this evaluation, because of the Company’s limited resources and limited number of employees, management concluded that our disclosure controls and procedures were not effective as of June 30, 2016.

 

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Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of the financial statements of the Company in accordance with U.S. generally accepted accounting principles, or GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

 

With the participation of our Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2016 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation and the material weaknesses described below, management concluded that the Company’s internal controls were not effective based on financial reporting as of December 31, 2015 and June 30, 2016 based on the COSO framework criteria. Management has identified control deficiencies regarding the lack of segregation of duties, tax compliance issues and the need for a stronger internal control environment. Management of the Company believes that these material weaknesses are due to the small size of the Company’s accounting staff and reliance on outside consultants for external reporting. The small size of the Company’s accounting staff may prevent adequate controls in the future, such as segregation of duties, due to the cost/benefit of such remediation.

 

To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and outside accounting consultants. As we grow, we expect to increase our number of employees, which will enable us to implement adequate segregation of duties within the internal control framework.

 

These control deficiencies could result in a misstatement of account balances that would result in a reasonable possibility that a material misstatement to our consolidated financial statements may not be prevented or detected on a timely basis. Accordingly, we have determined that these control deficiencies as described above together constitute a material weakness.

 

In light of this material weakness, we performed additional analyses and procedures in order to conclude that our consolidated financial statements for the quarter ended June 30, 2016 included in this Quarterly Report on Form 10-Q were fairly stated in accordance with US GAAP. Accordingly, management believes that despite our material weaknesses, our consolidated financial statements for the quarter ended June 30, 2016 are fairly stated, in all material respects, in accordance with US GAAP.

 

This Quarterly Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Quarterly Report on Form 10-Q.

 

Limitations on Effectiveness of Controls and Procedures

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We may be involved from time to time in ordinary litigation, negotiation and settlement matters that will not have a material effect on our operations or finances. We are not aware of any pending legal proceedings against us or our officers and directors in their capacity as such that could have a material impact on our operations or finances. During the period covered by this report, we were served with a lawsuit from one of our creditors. On July 8, 2016, a judgment was entered against us in the amount of $10,000 in favor of a creditor and we paid the amount due under this judgment of $10,207 on August 2, 2016 in full settlement of this dispute.

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company, we are not required to include disclosure under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the three-month period ended June 30, 2016, the Company issued the following equity securities:

 

On May 19, 2016, 18,182 shares of common stock were issued to Rodney Sperry as payment for consulting services performed for the Company. These shares were valued at $0.99 (0.18 pre-split) per share for a value of $18,000. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On June 3, 2016, 500,000 shares of common stock were issued for the conversion of debt obligation to Clavo Rico, USA, a related party. These shares were valued at the amount of the debt converted of $725,853. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 3(a)(9) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

On June 30, 2016, 20,100 shares of common stock were issued to Bodell Construction as payment for equipment acquired by the Company. These shares were valued at $0.50 per share for a value of $10,050. These shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended pursuant to Section 4(a)(2) of the Act and/or Rule 506 of Regulation D promulgated thereunder since, among other things, the transactions did not involve a public offering.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable as the Company conducts no mining operations in the U.S. or its territories.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit No.   Description
     
3.1   Articles of Incorporation (1)
3.2   Certificate of Amendment, effective March 5, 2010(2)
3.3   Certificate of Amendment, effective June 23, 2010(3)
3.4   Articles of Merger, effective May 17, 2013 (4)
3.5   Bylaws (1)
4.1   Note Purchase Agreement by and among the Company and the Iconic Holdings, LLC, dated February 18, 2014 (6)
4.2   Convertible Promissory Note issued to Iconic Holdings, LLC (6)
4.3   Securities Purchase Agreement by and among the Company and Typenex Co-Investment, LLC, dated September 24, 2014 (7)
4.4   Convertible Promissory Note issued to Typenex Co-Investment, LLC (7)
4.5   Warrant to Purchase Shares of Common Stock issued to Typenex Co-Investment, LLC (7)
4.6   Convertible Promissory Note issued to Claymore Management dated October 2, 2015 (9)
4.7   Convertible Promissory Note issued to GAIA, Ltd. dated October 2, 2015(9)
4.8   Convertible Promissory Note issued to Legends Capital Group dated October 2, 2015(9)
4.9   Convertible Promissory Note issued to LWB Irrevocable Trust dated October 2, 2015(9)
4.10   Convertible Promissory Note issued to Silverbrook Corporation dated October 2, 2015(9)
4.11   Amendment to Convertible Promissory Note issued to MDL Ventures dated January 1, 2016(9)
     
4.12   Amendment to Convertible Promissory Note issued to MDL Ventures dated January 1, 2016(9)
10.1   Agreement by and between Crawford Cattle Company LLC, as seller, and, Inception Mining Inc., as Buyer dated as of August 30, 2013 (5)

 

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10.2   Employment Agreement with Michael Ahlin dated August 1, 2015 (8)
10.3   Agreement and Plan of Merger dated August 4, 2015 (8)
10.4   Addendum to Agreement and Plan of Merger (8)
21.1   List of Subsidiaries(9)
31.1*   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 *   Certification of Chief Executive and Chief Financial Officers pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*   Filed herewith.
(1)   Incorporated by reference from Form SB-2 filed with the SEC on October 31, 2007.
(2)   Incorporated by reference from Form 8-K filed with the SEC on March 10, 2010.
(3)   Incorporated by reference from Form 8-K filed with the SEC on June 28, 2010.
(4)   Incorporated by reference from Form 10-Q filed with the SEC on May 20, 2013.
(5)   Incorporated by reference from Form 8-K filed with the SEC on September 6, 2013.
(6)   Incorporated by reference from Form 10-Q filed with the SEC on June 20, 2014.
(7)   Incorporated by reference from Form 8-K filed with the SEC on October 7, 2014.

(8)

(9)

 

Incorporated by reference from Form 8-K filed with the SEC on October 7, 2015.

Incorporated by reference from Form 10-K filed with the SEC on May 3, 2016.

   

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  INCEPTION MINING INC.
     
Date: August 15, 2016 By: /s/ Michael Ahlin
  Name: Michael Ahlin
  Title: Chief Executive Officer (Principal Executive Officer)
     
  By: /s/ Trent D’Ambrosio
  Name: Trent D’Ambrosio
  Title: Chief Financial Officer (Principal Financial and Accounting Officer)

 

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